The Trump administration proposed ending a complex system of drug rebates that influence tens of billions of dollars in U.S. pharmaceutical spending, a move that could upend the relationship between drugmakers and pharmacy benefits middlemen.

The proposal, a long-awaited part of the administration’s plan to target high list prices of drugs, would ban rebates paid by drugmakers to pharmacy benefit managers, or PBMs, in government programs like Medicare.

Those rebates have been called anticompetitive by critics, who blame them for forcing many patients to pay more out of pocket. Under the administration proposal, rebates would instead be passed along directly to customers.

The proposal comes ahead of President Donald Trump’s State of the Union address scheduled for Tuesday, handing him a potential win on drug pricing — a major issue for both parties. The measure, released by the Department of Health and Human Services Thursday, would roll back so-called safe-harbor protections for such rebates, which kept them from running afoul of federal anti-kickback laws. The plan isn’t final and will be subject to a 60-day period for public comment.

The changes are “potentially devastating to the current pharma ecosystem,” said Eric Coldwell, an analyst with Baird Equity Research. “The U.S. health-care system is a sandcastle and the tide is coming in.”

Shares of major drug-plan providers fell. CVS Health Corp., which oversees drug benefits for more than 90 million Americans, fell 2.4 percent in late trading in New York, and Cigna Corp., which last year bought PBM giant Express Scripts, declined 1.4 percent.

Drugmakers pay rebates to insurers and PBMs in exchange for preferred status with those plans’ customers. Some of those rebates go toward insurance premiums, while the middlemen keep some for themselves. The pharmaceutical industry has said PBMs prefer higher-priced drugs so they can negotiate bigger rebates and pocket more of the money.

In a statement announcing the proposal, HHS Secretary Alex Azar blasted PBM rebates as “a hidden system of kickbacks to middlemen” that increases drug costs for Americans every day.

“This proposal has the potential to be the most significant change in how Americans’ drugs are priced at the pharmacy counter, ever, and finally ease the burden of the sticker shock that millions of Americans experience every month for the drugs they need,” Azar said in a statement.

Reporting by Bloomberg News over the past three years has examined a variety of pricing practices at PBMs that have been criticized by politicians and others for making it hard to tell where the money is going. In addition to the debate over rebates, PBMs also are under scrutiny over a practice known as spread pricing, a contractual arrangement that allows PBMs to pay pharmacies one price for a generic drug while charging higher prices to their health plan customers.

CVS said drugmakers were to blame for drug costs. “While PBMs have become a convenient target in the fight against skyrocketing drug costs, in reality they serve as a last line of defense for the consumer,” the company said in a statement.

Brian Henry, a spokesman for Cigna, said that rebates had helped keep premiums down overall. “It is short-sighted to look at one component of our offering as having a disproportionate impact on our business model,” Henry said in an email.

Under the proposal, safe-harbor protection would be eliminated for rebates drugmakers pay to pharmacy-benefit managers, Medicare Part D plans and Medicaid managed-care organizations. A new safe harbor would be created for rebates on drug discounts offered directly to patients, as well as fixed-fee service arrangements between drugmakers and PBMs. Without safe-harbor protections, rebate money pocketed by PBMs could be considered an illegal kickback.

Congress

While the out-of-pocket cost for many people picking up drugs at the pharmacy would decline, the premiums they pay for coverage would rise. Premiums for Medicare drug plans under the proposal could increase anywhere from 8 percent to 22 percent while average costs patients pay out of pocket would fall 9 percent to 14 percent, according to the Department of Health and Human Services.

It would be up to Congress to write new laws banning rebates in commercial plans that cover most working-age Americans, and the reception on Capitol Hill was mixed. In the Democrat-controlled House of Representatives, the chairmen of two key committees overseeing health care criticized the proposal.

“The majority of Medicare beneficiaries will see their premiums and total out-of-pocket costs increase if this proposal is finalized,” Ways & Means Committee Chairman Richard Neal of Massachusetts and Energy and Commerce Committee Chairman Frank Pallone of New Jersey said in a joint statement. “We are concerned that this is not the right approach.”

House Speaker Nancy Pelosi likewise urged Trump to work with lawmakers on drug costs.

“President Trump must work with Congress to deliver the real, tough legislation needed to actually drive down the price of prescription drugs for seniors and families across America.” she said in a statement criticizing the plan.

The Pharmaceutical Care Management Association, an industry group for PBMs, said it was reviewing the proposed rule.

“We stand ready to work with the administration to achieve our shared goal to reduce high drug costs,” PCMA Chief Executive Officer JC Scott said in a statement.

The Pharmaceutical Research and Manufacturers of America, the main drug industry trade group, applauded the move. The proposal would “fix the misaligned incentives in the system” that now result in insurers and PBMs favoring medicines with high list prices, PhRMA CEO Stephen Ubl said in a statement.

Copyright 2019 Bloomberg.

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